Many companies have employees' funds in 401k, 403b and IRA accounts. Typically, there is a person or persons whose job it is to manage the funds; those person(s) (trustees) bear the “highest duty known to the law.” Given the U.S. Supreme Court's (SCOTUS) recent unanimous May 18, 2015 ruling: “Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.” Also useful to note are their words: “Rather, the trustee must “systematic[ally] consider[r] all the investments of the trust at regular intervals” to ensure that they are appropriate.”
This creates a rather large liability for companies and trustees of lawsuits and federal government (e.g., U.S. Department of Labor (DOL), Internal Revenue Service (IRS) enforcement for mismanagement of the retirement plan investments). Furthermore, with better management, the investments may perform better and grow faster which enhances retirement security for millions of American workers.
Qualified retirement plans such as: 401(k), 403(b), profit sharing plans and others are facing two new challenges: 1) the 2015 9-0 Supreme Court ruling that requires plan fiduciaries to monitor their investment portfolios forever (no statute of limitations as had previously been understood) and; 2) a recent U.S. Department of Labor revised and expanded definition of the term fiduciary. The combination of the SCOTUS ruling and DOL definition revision has significantly changed the retirement plan landscape and its importance is emphasized to the client companies and their fiduciaries.
The qualified retirement plan (401(k)/403(b)) is the only retirement savings many participants have and those who are charged with offering them have always had a duty to put the sole interest of the participants and their beneficiaries first:
Every aspect of the plan (administrative & investments) must have the participant in mind. As fiduciaries, you must ensure that all fees are reasonable and all the providers who service the plan (recordkeepers, investment advisors, paying agents, accountants, etc.) are necessary for its operation.
The plan must always be in compliance with the IRS tax code and the Employee Retirement Income Security Act of 1974 (ERISA).
Much of the background of ERISA comes from trust law that has evolved over the years. In fact, when an ERISA case is filed, it is common to cite trust law as the basis to support ERISA statutes. Example: Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee's duty to exercise prudence in selecting investments at the outset. [Justice Breyer from the Tibble case]
The Supreme Court decision (Tibble v Consolidated Edison No. 13-550 May 18, 2015) ruled that plan fiduciaries' duty to monitor all plan investments is infinite. If an investment consistently underperforms the criteria laid out in the written guidance or Investment Policy Statement (IPS), the fiduciaries must take steps to replace them. From the Court: A fiduciary must discharge his responsibilities “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use.
The second is the Department of Labor's revised definition of the term fiduciary. On Apr. 6, 2016, the U.S. Department of Labor released the final rule under ERISA. The Rule is the culmination of six years of effort by the DOL to significantly broaden the definition of “fiduciary” advice to ERISA plans and extend it to include advice on individual accounts including IRAs. Essentially, if anyone gives investment advice to a 401(k)/403(b) plan or IRA account, they are acting as a fiduciary subject to all the regulations, liability and responsibility involved. While brokers and advisors have two years to be fully compliant with the changes, the Responsible Plan Fiduciary (RPF) has no grace period; they need to be compliant now.